Wednesday, August 17, 2011

Krugman on MMT

Krugman first bashes MMT, then somehow makes an MMT argument presumedly without realizing it...

Franc thoughts on long-run fiscal issues
Anti-'MMT-types' migrate to stage II
MMT, Again
Printing Press Mystery

His acknowledgement:
Countries without a printing press are subject to self-fulfilling crises in a way that nations that still have a currency of their own are not. The point is that fears of default, by driving up interest costs, can themselves trigger default — and that because there’s a crossing-the-Rubicon aspect to default, once a country crosses that line it will probably impose fairly severe losses on creditors. A country with its own currency isn’t in the same position: even if it is pushed into some inflation, there’s no red line that need be crossed.

That’s why America isn’t Greece; and why the UK is being foolish in imposing eurozone-type austerity on itself.


  1. I think the issue here is that Krugman agrees with MMT's description, so long as its applied within a limited range. He says in the third link above:

    The second case poses no problem, say the MMTers, or at least no worse problem than the first: the US government can simply issue money, crediting it to banks, to pay its bills.

    But what happens next?

    We’re assuming that there are lending opportunities out there, so the banks won’t leave their newly acquired reserves sitting idle; they’ll convert them into currency, which they lend to individuals. So the government indeed ends up financing itself by printing money, getting the private sector to accept pieces of green paper in return for goods and services. And I think the MMTers agree that this would lead to inflation; I’m not clear on whether they realize that a deficit financed by money issue is more inflationary than a deficit financed by bond issue.

    For it is. And in my hypothetical example, it would be quite likely that the money-financed deficit would lead to hyperinflation.

    The point is that there are limits to the amount of real resources that you can extract through seigniorage. When people expect inflation, they become reluctant to hold cash, which drive prices up and means that the government has to print more money to extract a given amount of real resources, which means higher inflation, etc..

    In this regard, I think I pretty much agree with him.

    It seems to me (I don't know if this is Krugman's rationale) that the problems start to creep in when people make the assumption that if the government spends significantly more than it takes in, that this won't generate inflation so long as we're not at full employment because the excess spending will result in more economic activity going on and thus effectively create growth. That assumes, however, that what the government spends money on is actually productive. If it's not productive, or not every productive, then essentially it's injecting money into the economy while the work and resources remain the same -- which over the long term means inflation.

  2. Yes I think you are right, but he seems to think that MMT'ers are unaware of this. MMT'ers are probably over-zealous about saying inflation won't be a problem until full employment (and indeed with a job guarantee program the two are inextricably linked) but its likely that before full employment and without a buffer stock of labor that inflation would ensue. Everything I have read suggests MMT'ers understand this, Krugman is making a 'straw man' by saying we think deficits are never a problem.

    Hyperinflation though I still think is highly unlikely. It depends on what you think hyperinflation is, 5%, 10%, 50%, 100% or whatever. Deficits would have to be equally outrageous at or around full employment.

    I agree also that what the government spends its money on does matter.

    Yet Krugman still seems to "reject" MMT. I don't think he realizes that what he is rejecting is not MMT, but rather what he thinks is MMT.

    So maybe my use of the word 'bashes' is out of life. 'Rejects what he thinks is MMT' is probably more appropriate.